Transcript Measuring National Income
AS Economics
Measuring National Income
AS Economics
What is National Income?
• National income measures the total value of goods and services produced within the economy over a period of time • National Income can be calculated in three main ways • 1. The
sum of factor incomes
earned in production • 2.
Aggregate demand
for goods and services • 3. The
sum of value added
sector of the economy from each productive
Why is national income important?
• Measuring the level and rate of growth of national income (Y) is important to economists when they are considering: – Economic growth and where a country is in the business cycle – Changes to average living standards of the population – Looking at the distribution of national income (i.e. measuring income and wealth inequalities)
Your task
AS Economics
Put the following economies into a rank of size from largest to smallest for the top 10….latest statistics is for 2006.
Not all of these are obviously in the top 10!
• • • • • • • • • • Australia Belgium Brazil Canada France Germany India Italy Japan Mexico • • • • • • • • • • • Netherlands People's Republic of China Russia Saudi Arabia South Korea Spain Sweden Switzerland Turkey United Kingdom United States
Countries with largest GDP in 2005
Country World economy European Union 1 United States 2 Japan 3 Germany 4 People's Republic of China
5 United Kingdom
6 France 7 Italy 8 Canada 9 Spain 10 South Korea 11 Brazil 12 India 13 Mexico 14 Russia GDP (millions of USD) 44,433,002 13,446,050 12,485,725 4,571,314 2,797,343 2,224,811
2,201,473
2,105,864 1,766,160 1,130,208 1,126,565 793,070 792,683 775,410 768,437 766,180
Has the world economy grown or shrunk over this period?
2005 World economy European Union 44,433,002 13,446,050 • •
2006 Gross world product
48,245,198
European Union 14,609,836
Gross Domestic Product (GDP)
• GDP measures the value of output produced within the domestic boundaries of the UK • GDP includes the output of the foreign owned firms with production plants located in the UK • There are three ways of calculating GDP - all of which should sum to the same amount since by identity: •
National Output = National Expenditure = National Income
• Under the new definitions introduced in 1998, GDP is now known as Gross Valued Added
Aggregate Demand (AD)
• AD is the sum of the final expenditure on UK produced goods and services measured at current market prices • The full equation for GDP using this approach is • GDP = C + I + G + (X-M) • C: Household spending (consumption) • I: Capital Investment spending • G: General Government spending • X: Exports of Goods and Services • M: Imports of Goods and Services
GDP by Factor Income
• GDP is the sum of the final incomes earned through the production of goods and services • The main factor incomes are as follows: – Income from employment and self-employment – Profits of commercial companies – Rental income from the ownership of property • = Gross Domestic product (by factor income)
GDP by Factor Income (2)
• Only factor incomes generated through the output of goods and services are included in the calculation of GDP by the income • We exclude from the accounts: –
Transfer payments
(e.g. the state pension, income support and the Jobseekers’ Allowance) – Private transfers of money from one individual to another – Income that is not registered with the Inland Revenue
Welfare benefits
• Welfare benefits are excluded from the income approach to calculating national income • This is because welfare benefits are simply transfers rather than a reward for factors of production
GDP and GNP
• Gross National Product (GNP) measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas • Output produced by Nissan in the UK counts towards our GDP but some of the profits made by Nissan here are sent back to Japan – adding to their GNP • GNP = GDP + Net property income from abroad (NPIA) • NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from UK assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK
GDP and GNP
• GDP is the value of output produced by factors of production located within a country • Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP) • For the UK, GNP is higher than GDP
GDP per capita in 2004
Luxembourg United States Norway Ireland Switzerland United Kingdom Canada Australia Sweden Japan France GDP per capita 57 704 39 732 38 765 35 767 33 678
31 436
31 395 31 231 30 361 29 664 29 554 EU15 Germany Italy Spain Korea Czech Republic Hungary Slovak Republic Poland Mexico Turkey 28 741 28 605 27 699 25 582 20 907 18 467 15 946 14 309 12 647 10 059 7 687
AS Economics
Aggregate Demand
Learning Objectives
To understand the term aggregate demand
To know the components of aggregate demand
Previously on Macroeconomics Households Government Spending Tax Output (O) Government Tax Income (Y) Government Spending Firms Factors of Production Expenditure (E) Saving Banks Investment Exports Foreign Countries Imports
What determines the level of expenditure?
Aggregate demand
Total planned expenditure on goods & services in a given period of time (sound familiar?) AD is the total amount of demand in an economy AD has five components (five factors that determine the level of AD): C I G X M Consumption (consumer spending) Investment (expenditure by firms on capital goods) Government spending Exports Imports
Calculating AD
AD = C + I + G + (X – M)
Where: C = Consumption I G X M = Investment = Government spending = Exports = Imports
Understanding the Components of AD You will now work in small groups to prepare a 10 minute presentation on how one component contributes to the overall level of AD C I G X M Consumption Investment Government spending Exports Imports Group 1 Group 2 Group 3 Group 4 Group 5 Prepare a 10 minute presentation that explains how your factor You will have next lesson as independent study to prepare
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